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Oldest Swiss Bank Goes Down

Wegelin and Co, the oldest private bank in Switzerland, agreed to a fire sale to Raiffeisen Group in the middle of its death throes last week. Wegelin bank -- established 270 years ago in 1741 -- managed to survive every threat across three centuries: revolution, financial disaster, and war including being invaded by Napoleon, the Sonderbund civil war and then Hitler. Every threat except for one: the relentless assault on Swiss banking secrecy by the United States government to reclaim the funds lost through tax evasion schemes sold to its citizens. Wegelin is now finished, courtesy of Uncle Sam. How long before other Swiss private banks follow Wegelin's shocking demise?

Wegelin and Co, Private Bankers,Switzerland, 1741-2012

Why Did Wegelin Go Down?

The break-up of Switzerland's oldest private bank Wegelin -- involved in a row with US authorities over tax cheats -- became necessary when clients pulled 4 billion Swiss francs -- $4.35 billion -- of wealth in a very short period. January’s US indictment, which didn’t identify Wegelin, referred to it as ‘‘Swiss Bank A” and said that three bankers wooed US clients fleeing UBS AG, the largest Swiss bank. Wegelin said earlier this month that three bankers were charged in New York with conspiring to help US clients hide more than $1.2 billion from American tax authorities.

Remarkably, Wegelin bank neither had offices nor employees in the United States. They were 100% Swiss, and violated no Swiss law whatsoever. However, this was not enough to protect them. US authorities believed that a handful of Wegelin’s US clients were hiding assets and not paying taxes. The fact that the bank wasn’t subject to US law and it had zero legal responsibility in ensuring their customers filed tax forms became irrelevant. The US government ultimately crushed Wegelin. How? By threatening Wegelin bank with lawsuits, investigations, Internal Revenue Service (IRS) penalties and criminal charges levied personally against the bank directors, the US government succeeded in its mission. The scare tactics were enough to chase away the bank’s customers, and Wegelin has now sold what little was left of its non-US business.

Sale Price and Managing Partner's Statement

Although Wegelin did not make public the sale price of its non-US business, Konrad Hummler, the managing partner of Wegelin, said in a statement: “The immensely difficult and existence-threatening situation into which the legal conflict with the US authorities brought us forces me and my long-term partner Otto Bruderer, together with all unlimited-liability partners, to take this extremely painful action.” The purchase price for Wegelin bank's good assets was somewhere between 2.5 and 3 percent of the 21 billion Swiss franc total, putting the price tag somewhere around 500 and 600 million Swiss francs. Wegelin is still left with US assets under scrutiny from US prosecutors. Patrick Odier, chairman of the Swiss Bankers Association, said: “It’s regrettable that the oldest private bank of Switzerland has to be confronted with the only solution to sell itself to preserve the interests of its clients.”

Big Attack on Swiss Financial Sector: 11 Swiss Banks under Scrutiny

In December 2011 it was revealed that 11 Swiss banks had been given an ultimatum to hand over thousands of client names and pay billions in fines to avoid tax evasion prosecution in the US. The Swiss banks were under pressure to provide all correspondence with offshore clients over the past 11 years – with deadlines set for the end of December 2011 and the end of January 2012. Some of the banks in question were very close to caving in and delivering the data directly – until the Swiss government intervened and persuaded them to encrypt the data for the time being.

Washington Tightens Noose around Swiss Banks

Former UBS CEO Oswald Gruebel says he fears US authorities are likely only to tighten the noose around the Swiss financial sector. "The end of the bank Wegelin is only the prelude to a big attack on the Swiss financial sector... a solution to the tax dispute will likely be very expensive for these banks." UBS avoided US prosecution in 2009 by admitting it aided tax evasion, paying $780 million and handing over confidential data. The US Department of Justice (DoJ) has been steadily closing a net around Swiss banks ever since the UBS admission of assisting tax evasion by US citizens in 2009. The Swiss authorities were then compelled to water down banking secrecy laws by handing over the names of nearly 4,500 UBS clients. The DoJ and the US tax authority – the Internal Revenue Service (IRS) – have been building cases against other Swiss banks that are alleged to have either opened secret accounts from scratch or poached UBS clients who wanted to dodge the tax-evasion crackdown such as Wegelin. Amongst other major Swiss banks under US scrutiny are Credit Suisse and Julius Baer.

Encrypted Data and New Swiss Treaty with Washington, DC

The documents handed over to date to the US tax authorities are encrypted to protect the names of individuals and client advisors. The key to decoding the information will only be provided on assurances from the US government that no further action against Switzerland’s remaining 300 banks will be taken. Switzerland wants these assurances to be enshrined in a new treaty with Washington, DC. Mario Tuor at Switzerland’s State Secretariat for International Financial Matters, says the Wegelin "transaction shows how important it is to reach an agreement on the untaxed assets soon... from the Swiss perspective, the sooner we have an agreement, the better. Both the US and Switzerland want a quick solution, but not at any price.”

US-Swiss Talks

The Wegelin indictment came amid US-Swiss talks to resolve US probes of offshore tax evasion. The Bern-based Swiss government has been lobbying for a year to get the investigations dropped in return for the payment of a hefty fine and the transfer of names of tens of thousands of US bank clients. Switzerland and the US aim to conclude talks on the tax matters by the end of 2012. The negotiations have stalled because the US, which wants a fine in the billions, is demanding to see more bank client data.

After consultation with Credit Suisse and seven other Swiss banks, finance minister Eveline Widmer-Schlumpf has offered the US tax authorities millions of internal client emails. The number of documents already delivered is estimated to be on a large scale, most of which have been provided by bank giant Credit Suisse. Credit Suisse decided to turn over US client information rather than face summons.

The move is seen as part of Switzerland’s strategy to try to stem the tide of US attacks on Swiss banks.

Has Bern Misplayed Its Hand?

Successful deals with the Germans and the British, where cash, not information is handed over, may have lulled the Bern-based Swiss government into a false belief that cordial diplomatic relations would temper the US justice department and US tax authorities' zeal. Instead, the Americans seem to use each new piece of information intelligence to build another case over hidden funds and tax-avoidance schemes. The American Internal Revenue Service (IRS) wants names of cheats and to determine if banks broke US laws. Prosecutors also have been deft about getting indicted bankers to implicate their former colleagues, employers and clients, for leniency.

Some observers question the wisdom of the Swiss government's lure tactics, pointing to the risk that it might be seen as provocative by the US authorities. Switzerland may be mistaken to believe that a global solution is in the offing. The American side may not be interested in such a solution at this stage, because it would give them less opportunity to exert pressure by making examples of banks of the Wegelin-type and impose hefty billion dollar fines. Is the US more likely to come forward to make a deal when the juicy fruit has been squeezed totally dry?

FATCA Legislation

To add to Wegelin-type Swiss banking woes, there is the new American FATCA legislation: Foreign Account Tax Compliance Act. The law effectively requires every bank in the world to make a choice:

1. Accept Americans as customers, but agree to share information with the US government;
2. Close the door to all US citizens and residents forever; or
3. Thumb one's nose at the law, but risk becoming the next Wegelin & Co.

Needless to say, some banks are opting for #1 and some for #2 in order to avoid unnecessary scrutiny and disclosures.

Conclusion

1. Wegelin & Co is the first standalone Swiss bank to fire-sell its operations in Switzerland as a result of tax evasion pressure from the US. The twin-track civil and criminal approach seems to be working for the American authorities. The Wegelin case suggests the battles are far from over. The action taken by US justice and tax authorities vis-a-vis Swiss private banks may be a prelude to further action by European and Asian sovereign nations to recover their own taxes.

2. The American authorities show no sign of letting up and investigations may lead them to cantonal banks with links to the Swiss state. Though the Swiss are trying to preserve some semblance of their financial system, the anti-haven snowball looks set to keep rolling down the Alps.

3. Wegelin's fire sale is likely to be followed by more consolidation in Switzerland's embattled financial services industry as the old, low-cost model of booking secret money comes under relentless assault from major governments around the world following the lead of the US government.

4. Even the biggest banks cannot serve clients from every country, as wealth management increasingly requires an understanding of the real needs of clients – needs driven not only by the tax laws of their home countries and countries of investment, but by many other factors that are country-specific.

5. The reality is that the service and pricing model of the past no longer works as Swiss banking secrecy erodes and private wealth management goes increasingly on-shore.

Key Question

We have received multiple queries from distinguished members of the ATCA 5000 and key clients and partners of the mi2g Intelligence Unit in regard to the collapse of the oldest private bank – Wegelin (established 1741) -- in Switzerland. Is this a significant canary in the mine shaft in regard to what lies ahead for Swiss banking secrecy and does this asymmetric threat pose a systemic risk for Swiss banks in general?

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